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Nasdaq amends its board diversity proposal

On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

  • Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
  • Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
  • Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
  • Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
  • Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
  • Location of disclosure. Companies could choose to disclose

New ISS 2021 Factors for Governance QualityScore Address Investor Hot Topics

ISS recently released updated methodology for its Governance QualityScore (GQS) rating system for institutional investors.  The new factors relate to areas of emerging concern to investors, with 11 of the 17 new factors addressing information security risk and oversight.  Other new factors relate to board matters, such as diversity, inclusion, practices and composition, and to compensation matters, such as whether and the extent to which special grants have been made to executive officers.  ISS also extended to the U.S. market certain factors regarding the number of boards on which directors serve and shareholder voting rights.  ISS further indicated that the updated methodology reflects the rebalancing of certain existing factors in the categories of Board Commitments and Litigation Rights.

ISS reviews its methodology annually to ensure that its approach remains closely aligned with ISS’ benchmark voting policies and reflects developments in regulatory and market practices.  Key updates to ISS’ benchmark voting policies for the 2021 proxy season are summarized in our December 11, 2020 post. The new factors and factors newly applied to the U.S. market include:

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

  • What percentage of the committee responsible for information security risk is independent? (Q403)
  • How often does senior leadership brief the board on information security matters? (Q404)
  • How many directors with information security experience are on the board? (Q405)

Audit (Information Security Risk Management)

  • Does the company disclose an approach on identifying and mitigating information security risks? (Q402)

Don’t Forget! Refresher on Glass Lewis COVID-19-Related Guidance and ISS Compensation-Related FAQs

For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay

Nasdaq Board Diversity Proposal Faces Backlash

Nasdaq’s recent proposal mandating board diversity faces backlash, as 12 Republican senators on the U.S. Senate Banking Committee last week urged the SEC not to approve the proposed rules, which would require all U.S. Nasdaq-listed companies to disclose board diversity statistics and to have, or explain why they do not have, at least two diverse directors: one woman and one who self-identifies as either an underrepresented minority or LGBTQ.

While many anticipated that the SEC’s approval of the proposed rules would be a “slam dunk” given the current social climate, certain recent events suggest that approval may not necessarily be guaranteed.  These events include the senators’ disapproval and the SEC’s extension of the end of the comment period from January 25, 2021 to March 11, 2021.  Nasdaq and others, however, continue to fervently support the proposed rules.  In a letter dated February 5, 2021 to the SEC, counsel for Nasdaq reported that, by its count, 86% of the comment letters then submitted had supported adoption of the rules.  As reported in our December 2, 2020 post, Nasdaq believes its proposal would benefit investors and the public interest and cites in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  Nasdaq also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

In the letter urging the SEC not to approve the proposed rules, the senators noted that Nasdaq appears to them

SEC Division of Enforcement No Longer Recommending Settlement Offers Contingent on Waivers

In a Statement released on February 11, 2021, Acting SEC Chair Allison Herren Lee announced that, in a return to the longstanding practice of the SEC Division of Enforcement (the “Division”), the Division will no longer recommend a settlement offer conditioned on the grant to the company of a waiver from automatic disqualifications triggered by certain securities law violations and sanctions.  Such automatic disqualifications can, for example, prevent a company from being considered a Well-Known Seasoned Issuer (WKSI), engaging in certain private securities offerings under Rule 506 of Regulation D, and serving in certain capacities for an investment company.

In taking this action, Acting Chair Lee noted that while in many instances a waiver may be appropriate, the waiver determination should, as a policy matter, be made separately from considerations relating to the settlement of an enforcement case.  She further noted that waivers should not be used as a bargaining chip in settlement negotiations, and that reinforcing this critical separation ensures that both processes are fair and that consideration of requested waivers is “forward-looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.”  Going forward, waiver requests will be reviewed by the SEC’s Divisions of Corporation Finance and Investment Management under standards separate from the law enforcement mandate.

Nuts and Bolts of Electronic Signatures

As discussed in our November 24, 2020 post, amended Rule 302 under Regulation S-T permits the use of electronic signatures on documents “authenticating” typewritten signatures that are included in a company’s filings with the SEC, provided certain requirements are met.  The signatory first has to manually (i.e., with “wet ink”) sign a company’s form of “attestation” in which the signer agrees that the use of his or her electronic signature on authentication documents constitutes the legal equivalent of his or her manual signature for purposes of authenticating his or her signature on any filing for which it is provided.  The company’s electronic signature process must, at a minimum, also meet the following requirements as set out in updated Volume II of the SEC’s EDGAR Filer Manual:

  • require presentation of a physical, logical or digital credential that authenticates the signer’s identity;
  • reasonably provide for non-repudiation of the signature;
  • provide that the signature be attached, affixed or otherwise logically associated with the signature page or document being signed; and
  • include a timestamp to record the date and time of the signature.

As companies have begun to rely on amended Rule 302 to obtain electronic signatures on documents such as Form 10-Ks, Form 10-Qs and Section 302 and 906 certifications, here are a few of the questions and logistical issues that have arisen:

1. Are the authentication requirements met if a company emails a document for signature and asks that the recipient reply by email affirmatively indicating approval of

SEC guidance targets disclosures during “meme stock” volatility

February 9, 2021

Categories

Yesterday, the SEC’s Division of Corporation Finance issued guidance on securities offering disclosure during times of extreme price volatility, which it viewed as characterized by:

  • recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,
  • high short interest or reported short squeezes, and
  • reports of strong and atypical retail investor interest (whether on social media or otherwise)

The guidance was issued in the form of a sample comment letter to address topics such as:

  • On the prospectus cover page
    • recent price volatility and any known risks of investing under these circumstances
    • comparative market prices before and after the volatility
    • whether any recent changes in financial condition or results of operations are consistent with the stock price changes
  • Risk factors that address
    • recent extreme volatility
    • the effects of a potential short squeeze, including on purchasers in the offering
    • the effect of the number of shares being offered relative to the number outstanding, including on stock prices and investors
    • the potential dilutive effect of future offerings, if contemplated
  • Priorities for use of proceeds, insofar as the targeted proceeds are based on a current stock price that significantly exceeds the company’s historic average price per share, in the event the actual proceeds are less than expected

The staff noted that the sample comments do not constitute an exhaustive list of the issues that companies should consider.

U.S. Antitrust Agencies Suspend Early Termination of Merger Review Waiting Periods

Today, the U.S. antitrust agencies announced a temporary suspension of the long-time practice of granting “early termination” of required premerger waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”).

Historically, the agencies have granted early termination of the premerger waiting periods for transactions with no significant antitrust concerns. The Federal Trade Commission and U.S. Department of Justice Antitrust Division advised in a joint press release that they will be reviewing the early termination procedures and process, and no early terminations will be granted pending the completion of their review. Reasons cited for the temporary suspension and review included the transition to a new administration, high volumes of merger filings received to date in 2021, and the ongoing pandemic. The agencies employed a similar temporary suspension of early termination grants during March 2020, when they first implemented their temporary e-filing system in response to the pandemic. That suspension lasted less than three weeks.

Click here to read the Alert in full.

Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

Court ruling highlights confidentiality risks for non-employee directors who use outside email addresses

A recent decision by the Delaware Court of Chancery highlights risks for outside directors in using third-party email systems when communicating about confidential company matters.  In that case, the court ruled that attorney-client privilege was lost because of the lack of a reasonable privacy expectation.

The case arose out of a tender offer by Softbank for shares of WeWork that was oversubscribed but terminated prior to closing. During discovery, the plaintiffs sought documents from Softbank in the custody of “dual hat” employees of Softbank and its majority-owned subsidiary, Sprint.  The documents – which related to Softbank and not Sprint – were sent to or from Sprint email accounts but withheld by Softbank on the basis of its attorney-client privilege. 

The court explained that the privilege issue turned on whether the employees had a reasonable expectation of privacy in their work email accounts, which must be decided on a case-by-case basis, and applied the four-factor test established in In re Asia Global Crossing, Ltd.:

(1) does the corporation maintain a policy banning personal or other objectionable use, (2) does the company monitor the use of the employee’s computer or e-mail, (3) do third parties have a right of access to the computer or e-mails, and (4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies? [322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005)]

In this case, the court found that a number of factors supported production of the documents:

  • Although
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